Reed Smith: excess liquidity leading to aggressive structures

Maintaining price discipline will be the key challenge for private equity funds as alternative and traditional lenders compete for debt mandates.

Fierce competition between private debt funds and banks has led to conditions which could see sponsors overpay for assets, warned Perry Yam, head of private equity for EME at law firm Reed Smith, at a roundtable in London last week.

Market participants at the roundtable, held by the law firm and advisor Livingstone Partners, heard Yam argue that a market awash with liquidity from both types of lenders was “leading to a return to some aggressively levered transaction structures and borrower-friendly terms as market participants compete to win mandates”.

The issue is most acutely felt in the mid-to-upper segment of the mid-market and exacerbated by trends elsewhere. “High multiples are being offered by private equity funds on competitive bid processes for good businesses, particularly given the generally low M&A volumes and re-opening of public markets seen in the first half of 2014,” Yam continued.

Banks too remain under substantial pressure to lend to SMEs and maintain their loan book size, after repayments and refinancings have reduced their size, according to Yam.

“We expect to see a flurry of deal activity during the remainder of this calendar year, ahead of the speculated increase in interest rates and the 2015 General Election [in the UK],” Yam added.

However, the roundtable concluded alternative lenders had gained the upper hand in terms of lending over the last 12 months, no doubt benefiting from the lack of regulatory oversight to which banks are subject.

“Private debt funds have been setting the pace in the leveraged finance mid-market over the past 12 months and the unitranche product has become mainstream. It’s fair to say that UK banks are responding aggressively to the rise of private debt funds, but it is still very much a home-advantage to the alternative lenders,” Ben Davis, leveraged finance partner at Reed Smith, said.